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spk05: Good morning, ladies and gentlemen. My name is Emma, and I will be your conference operator. Today, we are hosting a conference call to discuss the first quarter 2022 financial results for VIQ Solutions. At this time, all participants are in a listen-only mode. For those that have dialed in, should you require any assistance during this call, please press star then zero on your touchtone phone. We will have a question and answer session at the end of the call, at which time all participants wishing to ask a question will be instructed to press star 1 and identify themselves before asking a question. Please limit yourself to one or two questions so that others may have a chance to ask questions. You may re-enter the queue. Your host today is Ms. Laura Kiernan, Head of Investor Relations for VIQ. Please go ahead.
spk06: Thank you, Emma. Good morning, everyone, and welcome to BIQ Solutions' first quarter 22 results conference call. Before we begin, I would like to point out that certain statements made on today's call contain forward-looking information subject to known and unknown risks, uncertainties, and other factors. For complete discussion of the risks and uncertainties facing BIQ, we refer you to the company's MD&A and other continuous disclosure filings, which are available on CDAR.com, As a reminder, all dollar amounts are in U.S. dollars, unless otherwise stated. Today's presenters are Susan Sommer, President and Chief Operating Officer of VIQ, and Alexi Edwards, Chief Financial Officer. Our CEO, Sebastian Paray, had a family emergency, and he will not be able to join us for the call today. Susan and Alexi will be able to answer all of the questions following the prepared remarks. I will now turn the call over to Susan Sumner to begin.
spk07: Thank you, Laura. And welcome to everybody to our first quarter earnings call for 2022. We are happy to be addressing you now, but the impact of the court's related COVID disclosures in our key regions seem to be behind us. While the predicted seasonality and closures impact March represents the first that the revenue is free from lockdown. It reflects the beginning of our recovery and the expectation.
spk04: The impact of COVID shows most the worst quarter for the court space in Australia.
spk07: But with that, we also see the rebound in March. This rebound is not only witnessed in our technology services business, but also in the activity that will build on the investments that we've made
spk04: evidenced in dramatic improvements in gross margin and services, as well in the interest in selling our technology services to key customers around the globe, stated that in Lee County, Florida, a high-profile murder trial could have been delayed as they had no live court reporters to support the This would lead them to the. This short. Trials and courtrooms in southwest Florida. Area and is affecting courts across the globe.
spk07: This is exactly the situation that is forcing government agencies to look at new ways to utilize hybrid technologies to ensure justice is served, but within a more efficient.
spk04: Ecosystem.
spk07: The ability of secure technologies that provide options to process audio and video and create transcripts in near real time are key to solving the backlog and the resource issues facing court agencies today. Delivery of the electronic transcripts seconds behind the spoken word, both in the courtroom and to remote events, gives attorneys and judges
spk04: live solution, which is to be released in beta later this quarter, will provide tools needed to offset the shortage and create real efficiencies.
spk07: We have the solutions our courtroom and legal clients need to help them solve their critical challenges. While our expected technology sales were delayed, our pipeline remains strong.
spk04: With three major technology trials in place, we believe that the novel solutions being implemented will continue to drive client engagement and pipeline growth.
spk07: In Q1, we signed two new technology services contracts to support court recordings and transcription services to facilitate providing transcripts of depositions. These contracts have an estimated annual value of approximately $1.9 million, which will increase annual recurring revenue and positively impact organic growth numbers post-COVID.
spk04: ...graphic and segment mixed... ...to support further investment in port technologies, given the response... ...segment. And in addition...
spk07: BIQ's ability to scale large contracts not only in Australia but also across the globe will continue to accelerate revenue improvements in our most strategic regions. The enhancements to our core technology to service complex court applications from workflow and customization of templates, formats, and language models will allow of the documentation our editors receive and a reduction in the overall headcount of clients that choose to buy these solutions to source their in-house application. This is at the heart of the trials that we are currently active across the globe. We are collaborating with major U.S. court systems to utilize our end-to-end solution suite to create efficiencies in the way testimony is managed. This high margin solution will help increase demand created by court reporter shortages and by automating the creation of a draft transcript that will be edited by those court resources. We are collaborating with notable court clients in the UK to use First Draft to create new ways to deliver content that will improve the accessibility of information in near real time with the ability to segment, search, and prioritize key data elements. These examples reflect the desire of our clients to Q2 and Q3 of this year. Our recent Fast Company Award recognizes VIQ's innovative approach to leveraging AI to create efficiencies and drive transparency in courtrooms around the world. Our suite of technologies and services to record, transcribe, and collaborate provides an end-to-end solution for the courtroom of the future. We are honored to be recognized by Fast Company for the ability of our solutions to make meaningful change. The success of our AI assist and the integration of our end-to-end workflow is central to our biggest technology trials. We are on track to achieve our goals this year, realizing at least $50 million in revenue and continuing to improve our gross margin to reflect the integration of our technology platforms across all verticals, including courts, recover from the stress of managing increased demand resulting from closures in 2020 and 2021. New products to be launched later this year will support this growth. and the depth of our end-to-end solution. And now I will hand this over to Alexi, who will speak about our financial results. We will then open the lines to answer your questions.
spk01: Thank you, Susan. And good morning, good afternoon, and good evening, everyone. Some of our Q1 highlights include revenue of $11.5 million increased by 40% driven by the acquisitions of Offscript and TPA. These were partially offset by lower technology sales in Q1. As Susan stated, we have three major active technology trials and a strong pipeline this year. Our revenue mix by vertical continues to evolve. In Q1, the mix by vertical was 58% for legal, including courts and law firms, 13% criminal justice, including law enforcement, 15% insurance, and 14% for media, corporate, and government combined. Gross profit was $5.5 million, or 47.6% of revenue, compared to $4 million, or 48.7% of revenue, in the same quarter of 2021. The increase in gross profit was primarily due to the Q4 acquisition and U.S. productivity gains partially offset by lower technology revenue versus comparative period in 2021. In addition, the comparative period in 2021 includes $0.1 million in COVID-19 wage subsidies. Excluding COVID-19 wage subsidies, gross profit margin for the three months ending March 31, 2022, would be 47.6% versus 47.3% in the comparative period in 2021. This represents a 30 basis point increase, which includes acquisitions that have yet to be integrated. Our adjusted EBITDA was negative $1 million versus adjusted EBITDA of positive $0.3 million in the first quarter of 2021. The decrease in adjusted EBITDA was driven primarily by lower technology sales not fully offset by higher technology services revenue and related gross profits. and higher selling, general and administrative expenses. Additionally, we have $0.3 million in COVID-19 wage subsidies in the comparable 2021 period. As has happened in the past, post-acquisition consolidation is expected to result in a favorable material impact on SG&A. Given that acquisition closed late in the fourth quarter of last year, our gross margin reflects pre-integration results this quarter. As we integrate acquisitions this year, we expect that our overall gross margins will gradually lift. Our SG&E expenses will decrease slightly as we gain operating leverage and as we begin to generate positive EBITDA. This quarter represents our first release of key metrics to track the progress of the core business. Given this is the first time we have presented these metrics, I will take a few minutes to share with you the key takeaways found within those metrics. We have seen significant gross margin improvement in our core technology services, driven by the migration to our technology, which increased from 38.4% to 46.5% year-over-year without subsidies. we will continue to drive improved results as we integrate and migrate our new acquisitions. And while gross margin, particularly in the technology services space, show the continuing improvement of our operations and influence of our technology, the cost to produce a minute of transcription, particularly in the U.S., which is furthest along in integration, shows a 13% reduction in the time to produce a minute of transcription. The impact of off-skip and TTA will, in the beginning, negatively impact the consolidated number as we move to integrate them and the remaining legacy clients into the vehicle technologies. Additional margin acceleration is expected. Our cash balance at Q1 was 3.7. Historically, Q1 has been the lowest quarter with respect to collection, and Q1-22 is no different. A significant portion of our business is tied to the core segment in Australia that closes for recess in late December to mid-late January. Additionally, resignation of finance staff has negatively impacted our collection efforts, especially in Australia. However, we have already seen a positive cash inflow in Q2. We're seeing meaningful improvements to key performance measures as we integrate the technology throughout our services operation, as well as an improved sales activity, which has resulted in increased organic bookings by 64%. The technology and technology services pipeline have strengthened, and related revenue will be realized during 2022. We have shown that the revenue, even with the seasonality and closures in Q1, firmly positions us to achieve our commitment of at least $50 million for the year. While we did not track the net promoter score in early 2021, we do know that based on the results of Q1, our NPS shows a world-class client engagement score of 86, which translates into a highly secure customer base. So, in summary, Q1 is the beginning of post-COVID recovery for VIQ. and quantitative measurements show that the technology and operations are performing as expected. We believe that Q2 will show a favorable impact in SG&A resulting from normal post-acquisition consolidation and efficiencies. The results in Q1, particularly the direction shown in March, leaves us very confident in the performance of the rest of the year. Now I would like to hand it over to the operator for our Q&A session. Operated.
spk05: Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question today comes from the line of Brian Kinslinger with Alliance Global Partners. Your line is now open.
spk03: Hi, great. Thanks for taking my question. And, you know, great recovery in the first quarter here from the fourth quarter. And I like the new stats on in the MD&A and that you've talked about. First, I want to touch on the transcription minutes that are running through automation, which is only 32% to date. First, when do you expect TSA and OScript to be automated on the platform? And then when you look at your entire book of business, are there some use cases that cannot use automation? And if so, what percentage does that represent?
spk07: Hi, Brian, and thanks for the question. It's a great question, too. So I'll answer them in the order that they were asked. In terms of TTA and OSCRIPT, as you know, we just closed on OSCRIPT in December. We are in the process, as we always do, of stabilizing that integration, working on the plan toward that migration, which we have always planned to take place. late in the second half of the year. The migration to the speech-to-text automation may actually happen earlier than that. But again, it is essential to us that we have a very solid migration that anticipates a transaction that doesn't negatively influence both contractor and customer experience. We're also implementing the very large contract in Australia mid-year, so that may influence the acceleration of that as well. On TTA, they will begin in the next couple of weeks, that migration, and we're very excited about what that means both to the customer base of TTA but also to the process in the pipeline. And yes, you're right. It only represents about 34% of our overall revenue. There are clients that required incremental development on the NetScribe platform in order to be able to successfully migrate them. And you will see the readiness of that evolution of the technology in late 2022. And that's when you'll see the remaining customers that we will move. But to your point, are there customers that will not make it to that? Yes, they may not make it to the platform. They may use different variations of AI Assist but not use that in conjunction with NetScribe. The goal is to make sure that we maximize the efficiency of the user experience and in certain applications such as media or in new segments that we may be looking toward. the introduction of our e-commerce application and the back-end technology of the AI Assist platform may be sufficient and not require the workflow technology. So we're constantly evaluating what the right mix is, but I think it's fair to say that as we exit 2022, get into 2023, you know, we expect that that 34% will be in the high 60s to 80s. Oh, wow.
spk03: That's huge. My follow-up is I realize your presence in U.S. courts is more limited than Australia and the U.K., but can you talk about the progress you're making there? You had a great anecdotal piece about Lee County. So how is the pipeline evolving? And more specifically, how are you attacking the market? You have tons of direct salespeople, a handful of direct salespeople. How are you attacking the market?
spk07: So in the United States we have a direct sales organization and we also have distribution channels that we talked a little bit about in the last earnings call. We also sit on the Kerasoft framework, which is the GSA enablement as well as the NASA enablement for the federal government. As you know, EOIR is one of our largest customers in the United States. So we do a combination of both. Depending upon what the requirement of the customer is, what the combination of technology, hardware, and services will be will certainly change our strategic approach toward how we're going to sell. I think you're going to see a difference in the services requirement in the United States versus the way we accelerate that delivery in other geographies. I believe that SaaS, in terms of the end-to-end integrated technology will be facilitated in the sale to the court and governmental entities versus a more bifurcated sales approach that you see in the rest of the world where they tend to buy capture technologies and then transcription services. In the U.S., many of those court systems have independent in-house transcription services because of the complexity of the approval process that is unique to the United States, which is absolutely why we believe that the end-to-end technology that we're now testing in the Midwest is going to be the right application to solve for this resource crisis that they're experiencing in the United States.
spk03: Great. One numbers question, then I'll get back in the queue. Alexi, can you provide the total revenue contribution from the two acquisitions in the first quarter?
spk01: For the first quarter? $4 million.
spk03: Great. $4 million. Thank you so much, guys. Thank you. Thanks very much.
spk05: Thanks, Brian. Your next question comes from the line of Daniel Rosenberg with Paradigm Capital. Your line is now open.
spk02: Thanks for taking my question. My first one revolves around the selling and administrative expense line. I know you had mentioned you're expecting a slight decrease there. So I just wondered, what does a normalized level look like as you think through having the acquisitions fully integrated?
spk01: Thanks, Daniel, for the question. In terms of a normalized level, we... I would use Q1, but when we look at SG&A, there are a number of factors that influence that. Because of integrating the acquisitions, we have not yet made some changes in terms of consolidation and realizing some of the efficiencies. But Q1, it's a quarter where it's the first quarter of the year, and It's a diet, it's a range, but there are too many factors influence it, so I really don't want to get you telling you to use Q1 as a diet because of the number of factors that influence Q1. As we progress through the year, you will get a better indication of what our SG&A is going to be. When you look at Q1 versus Q1 last year, I mean, it's higher by 2.4 million, I think, and $2 million of that is attributed to the acquisitions. And as we progress through integrating these acquisitions, those SG&A are excited to get a favorable impact from integrating those acquisitions.
spk07: And Daniel, I'll just jump in and add to that. You saw us last year in the second quarter where we announced consolidation improvements in the SG&A. I think that you'll continue to see our approach toward consolidation consistent in the same amount of time from post acquisition into consolidation but you're also going to see toward the second half of the year the improvements that are tied to our project titan you've heard me talk about we will begin utilizing global resources for administrative support as we have attrition to replace headcount in lower cost regions where that function can still provide secure And so we're very excited about what that's going to mean for the second half of the year as well.
spk02: And that's an interesting point around the labor front. So could you speak to any changes in the dynamic in terms of you guys accessing transcription, human capital, any changes in pricing or labor costs that you're seeing? or just supply demand?
spk07: Certainly there is an extraordinary amount of demand. We are very, very fortunate that we're able to distribute the demand around the globe to the degree that it is possible without the restrictions of sovereignty that exist within certain contracts. you will see the offset of some of the incremental costs due to CPI changes by the reduction in cost of the migration from transcription costs to editing costs. So you will still see a downward trend even in a more competitive labor market on the editing cross. We're also moving into a different kind of labor market as we pivot from transcriptionists, which seem to be in more high demand, to a more editing function where we can train a new labor force. It also seems to be, based on what we're seeing from our recruiting organization, perfect for the migration to the stay-at-home worker. So we are getting a very large pipeline in terms of applications that are coming from people that are not in the industry but are changing industries in order to take on a new skill set that will allow them to continue to work from home post-COVID.
spk02: Okay. Thanks for that. I know in the past you had spoken to organizing the sales team with a greater focus on RFPs and larger type contract wins. I was wondering if you could provide some color around just how you view that sales pipeline in terms of the opportunity there and your ability to convert.
spk07: We're doing an extraordinary job in terms of delivering a higher acceleration of RFPs. What we saw in 2021, and you've heard me speak to this before, I won't get into the specifics, but we won a major RFP that we had been working on for over two years that was then stalled because of the time it took to actually get the award out the door. All of those decisions, because of the pressure around the court systems, are now beginning to accelerate. So the pipeline that you see for our technology services in terms of RFPs that we're responding to is pretty significant. The RFP that we won for the big part of that contract that was announced in my comments was also part of the pipeline of the last two years that just took a lot longer to build into the results of the organic revenue. So we're not seeing as much of the result, but that's not a factor that we haven't built up that RFP team. It's that there was a slowdown in the velocity of RFPs coming out because of the COVID backlogs that you're now beginning to see in terms of acceleration. So I think we've done as many RFPs in Q1 as we did in the entire year last year. So that just gives you an idea in terms of the velocity of what we're putting through that new group.
spk02: Great, that's good to hear. Lastly for me, just on the balance sheet, so you ended the quarter, I think it's $3.7 million in cash. I was just wondering how does working capital move with receivables and payables in the near term and also as you're digesting the acquisition?
spk01: Yeah, great question, Daniel. You know, as I indicated in my prepared remarks, The cash balance was 3.7. Q1 is always a tough quarter in terms of collection of receivables. It was impacted by, you know, the closures in Australia primarily. And, you know, we were down some staff members in terms of affecting negatively our collection efforts. So, you know, we've already seen a reversal of that trend already in Q2 where we have collected a lot of the outstanding cash. So we expect Q2 to show positive working capital as we take action to consolidate the acquisitions and the collection efforts. We see the fruits of the collection efforts.
spk02: Okay, thanks for taking the questions.
spk01: Thanks, Daniel.
spk05: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Scott Buck with HC Wainwright. Your line is now open.
spk00: Hi. Good morning, guys. Good morning, Scott. I want to apologize if any of these have been asked. I've been jumping back and forth between calls. The first one for me, just given the momentum in Australia, what do you guys see there as the potential opportunity going forward? Is there still a meaningful amount of new business that you can contract with there?
spk07: We have, in the next, I think, two months, we will have three major RFPs that we will be participating in. And then as we look to this year, you will see, and those were predominantly, Scott, for services. We have several opportunities for integrated end-to-end solutions, and I think you'll begin to see more technology-only services. again, they begin to crawl out of the post-COVID recovery or crawl out of post-COVID and into recovery. There is a lot of upside. I mean, the business is in very large chunks which positions us extraordinarily well in that region but there is about a five year to six year window once you've won an award before that award becomes available so it was quite your last year next year this year we'll we'll gain awards that will have a value that are pretty significant for 2023. And what we haven't seen in the last two years that we believe will accelerate toward the end of this year is more of the integration of the actual technology or the migration to SaaS solutions that we're seeing in the United States right now.
spk00: Great. That's some really good color. Second one, gross margin was up meaningfully, you know, sequentially and year over year. How should we think about the longer term gross margin opportunity? I mean, what is the ceiling on the business?
spk01: As we noted, Scott, the gross margin for Q1 was 47.6%. And as Susan alluded to earlier, when we look at the fact that in Australia, none of the core customers are already on our platform, we expect to see gross margin gradually lift. In our guidance, we provided 47% to 55% gross margin, and we are confident that we'll be able to achieve that target this year as we migrate the two acquisitions and we start to see improvements from those gross margins to show an uplift point later this year.
spk00: Okay, that's helpful. And in five years, can this be at 65%, 70% gross margin business? I don't know.
spk01: What I can say, Scott, is that we are constantly going to implement improvements. We expect to, as I said, migrate those customers to our platform. We do know that if we do acquisitions in the future, usually the first three to six months, depending on the acquisition, that may negatively impact the gross margin. But it's our goal to have continuous improvements in our gross margin.
spk07: I appreciate that. Yeah. In addition to what Alexi said, I mean, I think that if you look at the cost to produce a minute of documentation that Alexi talked about, the bottom line is we believe that sometime in 2023, 2024, we will be able to produce a document that is usable by our segments that is significantly less cost to produce than it is today.
spk00: Okay. That's helpful. And then just the last one for me, Alexi, I don't know if you've disclosed before, but what do you guys see as the potential expense synergies from the recent M&A deal? Sorry, could you repeat that? I didn't get the first part. Yeah, I'm not sure if you guys have disclosed this before, but what do you think is a reasonable expectation for expense synergies from the integration of the recent M&A deal?
spk01: Yeah, we're going through that process as we speak now, Scott. And we will be those synergies and cost savings based on the consolidation of work and the different businesses that we acquired, we expect those to show a favorable impact to our SG&A, starting in Q2 and in Q3. We haven't quantified what that number is right now, but there are a number of opportunities that we're taking advantage of to reduce the SG&A for those two acquisitions.
spk00: Okay. I appreciate the additional color, guys, and congrats on a strong start to the year.
spk05: Thank you.
spk00: Thanks, Bob.
spk05: Your next question, again, comes from the line of Brian Kitzlinger with Alliance Global Partners. Your line is now open.
spk03: Hi, great. Thanks. I think I heard you correctly saying that in March was the first quarter you worked out so many of the headwinds that, unfortunately, the company had faced for the last year plus. So I guess I'm curious, as we look at March and we look at April, Was the company profitable on an adjusted EBITDA basis? Was it break even? You weren't that far off in the first quarter, and it sounds like expenses were a little bit high compared to where they're going to be going forward.
spk01: So what we have said, Brian, is that when we look at the monthly results, March provides us with a good indication that we have turned a corner. Q1 was impacted by COVID court closures in Australia. Also, there was a flood in Brisbane, which the courts were shut down for, I think, five days. So that negatively impacted January and February. But based on what we have seen in the March results, It's a trend in the right direction. We believe that we're going to be profitable from EBITDA going forward based on the latest numbers we are seeing for March. We haven't disclosed our quantified April yet, so we cannot speak to that. But based on what we have seen in March, we seem to trend in the right direction.
spk03: Great. Sounds fantastic. Thanks so much.
spk01: You're welcome, Larry.
spk05: There are no further questions at this time. I would like to turn the conference back over to Susan Sumner for closing remarks.
spk07: Thank you guys for your time today. We really were excited about spending time talking about Q1 2022. We certainly wish Seven and his family the best, and I know he looks forward to speaking with everyone at the AGM on June 7th and participating in Q2 results later this summer. I hope you all have a great and safe weekend.
spk05: This concludes today's conference call. Thank you for attending. You may now disconnect.
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